Federation of New York Solid Waste Association 2016 Conference
Recycling Markets Impacts on Solid Waste Management Systems
-Looking at the Big Picture
Theodore S. Pytlar, Jr, Vice President, D&B Engineers and Architects, P.C.
Review causes of the downturn in the value of recyclables
Review adjustments being sought by the private sector in response to the down market
Suggest equitable responses based upon the linkage between market prices and fuel prices
Offer additional MRF operations, contracting and budgeting approaches for managing market fluctuations
1.0 OBJECTIVES OF THE PRESENTATION
Take a “Big Picture” look at the following aspects related to the Declines in Market Prices for Recyclables using information from the trade media and a solid waste management system analysis
Global macroeconomic factors caused decline in all container and fiber recyclables prices
“Deflation has been observed across all recycled commodities-metal, paper, plastics, and cardboard-attributed in large part to the sharp decline in oil prices, the slowing global economy, and reduced economic growth in China.”
(“Spotlight on Diversion”, Environmental Services Insider – Brown, Gibbons, Lang and Company, January 2016)
Plastics were especially hard hit due to the direct connection to the price of oil
Decline in plastics also puts downward pressure on steel and aluminum
(WMI VP of Recycling in Waste 360, March 16, 2016, “the Challenges Low Oil Prices Bring to the Waste and Recycling Industry”)
Figure 1 Illustrates the linkage between oil prices and the average revenue for recyclables (ACR)
2.0 Causes and Effects
Figure 1. Relationship Between Average Recyclables Container Market Revenues and Oil Prices
(ReCommunity Regional VP, “RECommunity Delaware”, NERC Confernece, April 7, 2015
Occurred on the heels of very high markets
Illustrated by Figure 1-2012 was
an historically high market year
High markets resulted in
“irrational-exuberance”
(Alan Greenspan)
Risky contractual positions by
waste service companies
Expansion in recyclables accepted by recycling programs
“We’ve all been participating in a
fantasy that the revenue you get from
the sale of commodities will cover the
cost of recycling” (Casella VP, quoted
in Environmental Services Insider –
Brown, Gibbons, Lang and Company,
January 2016
Accompanying “halo” effect – as a recyclables expanded, contaminants expanded…and were accepted “Material specifications were only lightly enforced, and lower quality material became accepted as normal.” (Susan Robinson, “Re-Drafting Relationships”, Resource Recycling Magazine, November 2015)
3.0 Effects of the Declining Markets Shortfalls in governmental waste management agencies’ budgets and
community revenue sharing “Revenue from the sale of recycled times has dropped form nearly $1.9 million, five years ago to $405,260 so far this year, with three months left to go in the fiscal year, said Environmental Services Director Andy Quigley’. (With recycling market in the dumps, Tucson may charge new fee”, Tucson.com, March 31, 2016
Waste Service Companies’ Profitability Revenues from Sale of Recyclables Down Sharply Counteracted by Declining Fuel Costs Corporate Net Income Down for WMI and Up for Republic Waste Management, Inc. reports that recyclable materials commodity prices are down $20 per ton from January 2015 and are at the lowest levels since 2009. (Waste 360, February 18, 2016, “ Key Takeaways form Republic’s Q4 2015 Earnings”)
Republic Services reported that average commodity prices decreased 14 percent to an average of $108 per ton in Q4 2015; down from $126 per ton in 2015. (Waste 360, February 12, 2016)
Republic’s net income increased even though recyclables prices declined.
4.0 Potential Solutions
Short to Mid-Term Actions
Surcharges Contract Restructuring Improving MRF Operating Efficiency Budgeting Practices
Mid to Long Term Actions Extended Producer Responsibility Sustainable Materials Management Zero Waste
Remainder of the Presentation will focus on the short to mid-term actions
5.0 Surcharges
Industry Approach – Waste service firms are seeking surcharges
WMI established a “Fuel and Environmental Charge”
(www.wm.com/fec)
Republic established a “Waste – Related index”
(Waste 360, February 12, 2016)
Casella established a “Sustainability Recycling Adjustment”
(Waste 360, February 12, 2016)
The Surcharge Trap and “Zombie Fees”
Problem with surcharges is that once adopted, companies want to
continue them even after the justification no longer exists
“The collapsing price of oil that has upended the global economy has also caused understandable rejoicing at transportation companies, where big savings from cheap fuel will inevitably show up in the bottom line. Yet many of the surcharges that truckers, railroads, and – especially – airlines tacked on during the years of expensive oil have proven resilient. Travelers and other customers are still paying these zombie fuel fees even now, with crude at $32 per barrel.” (Bloomberg News, February 1, 2016, “Why You’re Still Paying Fuel Surcarges After the Oil Crash”)
“Only cruise lines have abolished fuel surcharges as energy cost share dropped off precipitously. Airlines, major trucking companies, shippers such as FedEx and UPS, and railroads all continue to assess fuel surcharges in the normal course of business.” (Bloomberg News, 2/1/2016)
Surcharge Revenues Have Become a Fixture in Waste Service Company Balance Sheets
WMI report shows decline in surcharge revenues that were similar to or larger than decline in recycling revenues
Q4 2015 saw declines of $43M in lower fuel surcharge revenues and $34M in lower recycling revenues. (Waste 360, 2/18/2016)
For calendar year 2015, recycling down by $211M and surcharges
down by $171M.
Republic has over 500 contracts with $250M in annual revenue that use a waste-related index for price adjustment, which “…consistently run higher than CPI.” (Waste 360, 2/12/16)
Even though fuel price declined, Republic’s index
(surcharge) revenues increased by more the CPI.
Will the Surcharges Ever Decline or Disappear?
For Casella - Maybe
“When commodity prices are better, the fee is smaller and can even go as low
as zero”. (Casella statement from Waste 360, 2/16/ 2016)
Apparently, for WMI customers, the answer is “no”.
“Q: Why is there a fuel surcharge when the cost of fuel is less than what it
was when my contract began or was renewed?”
“A: Our fuel surcharge uses a $.95/gallon baseline diesel rate, regardless of
when a customer’s contract begins or renews. We believe employing a fuel
surcharge that uses a common baseline rate for the company’s customers is
the best approach, as it results in a uniform fuel surcharge that can be
calculated by our customers by referring to the WM Collection Fuel
Surcharge Table”. (from www.wm.com/fec)
The Surcharge “Door” Should Swing Both Ways
According to the waste service companies, the surcharges are
needed in order to:
“…cover these costs (that they cannot fully control) and achieve an acceptable operating margin.” (www.wm.com/fec)
“… recover these costs (that they are unable to control) and achieve an acceptable operating margin.” (republicservices.com/customer-support/fee-disclosures)
To reflect “… the costs of the services provided in order to make recycling economically strong” (Casella, Waste 360, 3/16/16)
WMI’s Q4 2015…” Operating expenses improved $50 million (compared to Q4 2014). Lower fuel, lower commodity rebates and continued route optimization drove the improvement.” (Waste 360, 2/18/16)
Republic’s EBITDA…margin improved 10 basis points in 2015 compared to 2014…”primarily from lower fuel costs and pricing in excess of cost inflation…’ (Waste 360, 2/12/16)
If results show they are making “acceptable margins” even with market declines, do they need the surcharges?
If fuel surcharges were enacted when prices spiked, where are the rebates when prices plummet?
6.0 An Equitable Surcharge Strategy – Create a Linkage Between Fuel Prices and Recyclables Market Values
The linkage between fuel and recyclables values may be a long-
term fixture in the solid waste industry
How do fuel and recyclable price movements compare?
Example – The Solid Waste Management Program
Operations and Economic Model for the Town of Brookhaven
Detailed Model of all collection, MRF Operations, Recyclables
Revenues and Disposal Costs
Model Developed in 2010 for Evaluating Options for conversions to
CNG Fueling, Single Stream and Automated Collection
Utilized to Compare Decline in Recyclables Sales Revenues from MRF
to Reduced Fuel Costs for Collection During the 2014 – 2015 Period
Model Indicated That They Were Approximately Equal
o The Savings in Fuel to Collect a Ton of Recyclables Equals
the Reduction in Value of that Ton of Recyclables – Fig. 2
Strong Linkage Between Recyclables Market Value and Fuel Costs at
the Operations Level
Figure 2. Monthly Recycling Collection Cost Comparison 2014 to 2015
Manual Rear-
loader Collection
(Fuel: $3.92 per
gallon)
Manual Rear-
loader Collection
Fuel: $2.95 per
gallon)
Labor Driver’s monthly wage $1,196.94 $1,233.14 Number of drivers 51 51 Driver’s total monthly wage $61,044 $62,890.18 Helper’s monthly wage $689.21 $709.69 Number of helpers 51 51 Helper’s total monthly wage $35,150 $36,194.04 Profit^ $3,455 $3,513 Administrative costs/month^ $1,727 $1,756 Total monthly Labor, Profit and
Adminstrative cost $101,376 $104,353 Equipment Number of trucks 51 51 Monthly maintenance cost per
truck $550.00 $550.00 Total monthly truck maintenance
cost $28,050.00 $28,050.00 Monthly Insurance/truck $380.00 $380.00 Total truck insurance $19,380.00 $19,380.00 Fuel per month $32,894.84 $24,755.04 ($8,139.80)
Monthly truck payment cost $48,496.27 $48,496.27
Equipment per month $128,821.11 $128,821.11 MRF Revenues minus costs $19,413.08 $11,044.05 ($8,369.03)
Total cost $210,783.77 $222,130.19 Monthly carter cost per home $1.99 $2.02
Monthly cost per home $1.82 $1.92 Tons 311.1 311.1 Revenue per ton $62.40 $35.50
Due to the Linkage Between Fuel Costs and Recyclables Value, Total Collection, Processing and Marketing System Costs May Be Relatively Unchanged As One Declines and the Other Rises
For Private Sector, Annual Reports Indicate This Is The Case
For Public Sector, Contracts for Collection and Processing/Marketing Should Contain Surcharge Adjustment Mechanisms to Provide Protections for the Parties on the Upside and the Downside.
o If you have a collection or disposal contract with a surcharge and fuel prices are going down, make sure you are getting a negative surcharge credit.
o If you sign a contract with a fuel surcharge, set the surcharge at 0% on the service initiation date, and use the current cost of fuel as the baseline. This will allow both positive and negative surcharges.
o Specify the percentage of increase/decrease when surcharges/credits
will be applied.
7.0 Improve MRF Operating Efficiency
WMI has suggested ceasing collection of recyclables such as glass.
(Waste 360, 2/16/2016)
BUT, If recyclables are moved into trash collection and disposal, will any
money actually be saved? Trash collection and disposal costs will rise. Will
less recycling of low value or difficult to process materials and more
production using virgin resources result in increased emissions and
greenhouse gases?
Houston, Texas considering removal of glass from recycling program
Glass Packaging Institute Letter to Mayor – March 20, 2016 “… 95percent (of Americans) want glass to continue to be collected in their recycling programs.” “…the short-term gains of removing glass from the bin leads to long-term confusion regarding the effectiveness of recycling programs.”
Audits of Incoming Material Becoming Regular Practices at MRFs
Determine Proportion of Unacceptable Materials
Achieving Reductions in Unacceptable Materials
Use Audit Results to Provide Feedback to Haulers and Generators
Don’t Confuse Residents and Businesses Regarding What is Recyclable
Educate Residents and Businesses to Keep Non-Recyclable Items Out of the Recycling Bin
“When in doubt, throw it out” (MRF operations company representative)
Recognize the “halo” effect the next time the list of acceptable recyclables
is to be expanded
8.0 Additional Contractual Provisions
Structure Contracts for MRF Operations and Recyclables Marketing Services to Share the Market Pricing Risk
Operator receives a base fee for operations that is independent of market revenues
Operator also receives a share in the marketing revenue
Processing fees are escalated according to an inflation-related index.
Payments to contractor based upon actual
operating costs and nationally recognized indices, rather than an index developed by the contractor as is the case with the fuel surcharges.
Contracts also specify limits on contamination and establish right of contractor to reject loads containing excessive contaminants.
Consider combined contracting for collection and processing/marketing
Create an index that links fuel and recyclables
If you are not in a contract with a surcharge, evaluate the fuel cost savings for recyclables collection that have been occurring at the same time as the value of recyclables has been declining
o Respond to concerns regarding reduced market revenue shares from municipalities
9.0 Budgeting Practices
Set annual budgets based upon conservative recyclables revenue assumptions
Create awareness among elected officials of the linkage between fuel and recyclables market values and the need to view the system budget holistically
10.0 EPR/SMM/ZERO Waste
How can they assist in mitigating the market cyclicality issue?
11.0 Don’t Make the Same Mistakes Next Time
“The next big challenge is finding out what to do about the organic portion of the waste stream” (Casella VP from Waste 360, 3/16/2016)
